RWC has launched the RWC Global Enhanced Dividend Fund managed by its Equity Income Team. Ian Lance, John Teahan and Nick Purves, all of whom joined RWC in 2010, currently manage $4bn in Equity Income funds.
The RWC Global Enhanced Dividend Fund seeks to build on the success of the more UK focused RWC Enhanced Income Fund that launched in October 2010. The fund is designed to meet the needs of institutional investors, and offers global equity exposure and the potential of both a yield of around 6% and long-term capital appreciation above the rate of inflation. Additionally the fund aims to have a total return consisting of the income and the capital gain with a volatility of less than the equity markets. The yield is achieved through holding a portfolio of high quality defensive equities which on average yield 3%. This yield is then bolstered by an additional 3% by selling out of the money call options on the majority of the fund’s holdings.
This existing RWC Enhanced Income Fund has assets of $560m which come predominantly from UK investors and institutions who enjoy a high income stream and a total return achieved with a low volatility. RWC Global Enhanced Dividend Fund has already attracted investors from the UK and RWC has seen strong interest from overseas investors keen to increase their income with less market risk than traditional equity income funds would assume.
The new RWC Global Enhanced Dividend Fund seeks to achieve this in a number of ways:
· The companies the fund owns must have strong balance sheets, a history of earning high returns and generating cash, and must be available at a reasonable starting valuation. In aggregate, these companies will tend to be less volatile than the wider index.
· The call over-writing strategy further reduces volatility, as in a falling market the fund will keep the premiums from the option strategy.
· The fund will hold cash when the managers are unable to find a sufficient number of companies meeting their investment criteria which are also available at low starting valuations. The elevated cash level lowers volatility and gives the managers the ability to invest in high quality equities once valuations improve.
· Finally, the fund employs other methods of protection which reduce the exposure to a declining market and smooth the income stream from the fund. The result is a significantly lower volatility than the MSCI World Index (MSCI World).
Commenting on the launch, Ian Lance Portfolio Manager said:
“Given an increased opportunity set available from a global universe allows us to evolve our offering in a number of ways. We are able to flatten the holding structure which reduces stock specific risk and volatility. Additionally, the broader remit allows this fund to avoid many of the risks associated with stock and sector concentration associated with UK funds. For example in Pharmaceuticals where the UK opportunity is limited, a global approach allows us to access companies such as Elli Lilly and Johnson & Johnson which are just as appropriate for what we are looking to achieve.
“We have always used as much of our overseas exposure as possible in our existing funds to alleviate this problem and this new mandate is unconstrained allowing further diversification. We are still looking for similar types of opportunity as we have done for many years; there are just more of them globally.”
John Teahan, Co-Portfolio Manager added:
“Being a call writing strategy it is clear that income is the central objective. We endeavour to deliver a steady cash flow to our investors through quarterly distributions from the fund and grow those distributions in line with inflation.
“We have created an equity strategy that exhibits substantially lower volatility than equities and substantially reduced the real risk; that of a permanent impairment of our investors’ capital. Investors should be aware that we are less concerned about measures such as performance relative to an index and tracking error. Such measures of risk pay no attention to the concerns of our investors i.e. the risk of failing to meet income requirements or the risk to the absolute value of their capital.”
Dan Mannix, CEO of RWC added:
“We are seeing increasing demand for income and low volatility equity based funds. Ian, John and Nick have built a great team since joining RWC. They have developed their enhanced income strategy to offer something unique in the market with its focus on steadily increasing the level of income over index relative returns. This approach has real resonance with institutional investors who are facing up to the problem of low yields. Increasingly, there are those Investors who are prepared to sacrifice some of the short term upside in equity markets to improve the probability that their income objectives can be met on a persistent basis.
In particular we are seeing demand for this strategy from pension fund investors with a greater focus on yield as schemes mature. Combining equities with a covered call enhancement strategy allows these funds to extract greater levels of income today, while allowing for capital growth in the future.
Additionally charities and endowments continue to aim to have real growth in the value of their capital base whilst maintaining a level of income that is supportive of their responsibilities.
“The hunt for yield is a global problem and the strategies appeal to a wide range of overseas as well as UK institutional investors.”
“RWC continues to develop funds that answer investors’ needs in a differentiated way through pure active management. The search for differentiated equity strategies over the last eighteen months has seen RWC’s assets double to over $9bn with net inflows of over $1bn in the first quarter of 2014.”
